1. © Center for Tax and Budget Accountability 2008 1 CENTER FOR TAX AND BUDGET ACCOUNTABILITY 70 E. Lake Street Suite 1700 Chicago, Illinois 60601 direct: 312.332.1049 Email: rmartire@ctbaonline.org Pensions and the State Budgetrmartire@ctbaonline.org Illinois Association of School Board Officials Thursday, May 15, 2008; 10:30 am Pheasant Run Resort 4051 E. Main Street St. Charles, IL Presented by: Ralph Martire Executive Director

2. © Center for Tax and Budget Accountability 2008 2 BAD JUJU  Private Sector Pensions are down  Example, less than ½ of private sector workers in Illinois have employer provided benefits  Incomes are declining  Public sentiment is negative

3. © Center for Tax and Budget Accountability 2008 3 To top it off, we are spending more on public employee pensions over time $1.37 B 2007 $938 M 2006 $519 M 1995

4. © Center for Tax and Budget Accountability 2008 4 Fair – Bargain - Obligation  That said-People are fair. They’re just getting a distorted image from the media  Emphasize benefits and bargains to taxpayers, attack misleading myths, concentrate on concepts like fairness and meeting contractual obligations

5. © Center for Tax and Budget Accountability 2008 5 GRF Expenditures by Category 1995 - 2006 CategoryFY 1995 Actual FY 1995 CPI Adjusted to FY2006FY 2006 Enacted $ Difference Between 1995 Adj'd for CPI & 2006 Enacted FY 1995 ECI Adjusted to FY2006 $ Difference Between 1995 Adj'd for ECI & 2006 Enacted General Revenue Fund$17,302.0$22,613.7$24,406.4$1,792.7$24,776.5-$370.1 Education$3,656.0$4,778.4$6,123.0$1,344.6$5,235.4$887.6 Health Care$4,319.0$5,644.9$7,034.0$1,389.1$6,184.8$849.2 Pension$519.0$678.3$938.4$260.1$743.2$195.2 All public services except Health Care, Education and Pensions$8,808.0$11,512.1$10,311.0-$1,201.1$12,613.1-$2,302.1 **Notes: Health care includes Medicaid and state employee health insurance Sources: State of Illinois' Traditional Budgetary Financial Reports and Fiscal Focus Illinois' FY2006 Budget National Association of State Budget Officers Comptroller Fiscal Focus, January 1997 CPI and ECI based on Bureau of Labor Statistics SO – AS FOR SPENDING MORE:

6. © Center for Tax and Budget Accountability 2008 6 AS A PERCENTAGE OF THE PIE:

7. © Center for Tax and Budget Accountability 2008 7 Reality is Good  Recognize the problem exists, but explain the real reasons for it

8. © Center for Tax and Budget Accountability 2008 8

10. 10 HOW DID ILLINOIS GET HERE?

11. © Center for Tax and Budget Accountability 2008 11 Comparable State & Local Government Annual Retirement Benefits ARE BENEFITS TOO GENEROUS?

12. © Center for Tax and Budget Accountability 2008 12 Average State & Local Government Employment Annual Retirement Benefits

13. © Center for Tax and Budget Accountability 2008 13 Illinois State Retirement Benefits

14. © Center for Tax and Budget Accountability 2008 14 Participants in the Illinois Pension Plans TRSSURSSERSJRSGARSTotal Active Members250,540153,47589,735947265494,962 Beneficiaries85,15341,63854,678912395182,776 Totals335,693195,113144,4131,8596,600677,738 Percent of Total IL Population5.3% TOO MANY EMPLOYEES?

15. © Center for Tax and Budget Accountability 2008 15 FY07 Normal Costs of the Five Illinois Retirement Systems Normal Cost Percent of Payroll JRS$32,200,00023.47% GARS$2,400,00019.42% SERS$329,000,0009.17% SURS$319,584,00010.82% TRS$650,835,0748.20% Total$1,334,019,074 Total Weighted Average 9.13% TOO EXPENSIVE?

16. © Center for Tax and Budget Accountability 2008 16 SHORT CHANGING THE SYSTEM?

17. © Center for Tax and Budget Accountability 2008 IS SWITCHING TO A DEFINED CONTRIBUTION SYSTEM THE ANSWER?

18. © Center for Tax and Budget Accountability 2008 18  Because of Illinois constitutional restraints, switching to a defined contribution system does not and cannot reduce the state's current $44.2 billion unfunded liability. The sole way to cover this liability is to design a rational program that does not back load costs like current law.  Defined contribution systems have significantly higher annual administrative costs than fully funded defined benefit systems. If Illinois moved to a defined contribution system for all current participants in the five Illinois state pension systems, that change would cost taxpayers from $275 million to $610 million per year in additional administrative costs.  If contribution rates remained the same, defined contribution systems can be expected to generate significantly lower retirement benefits. When Nebraska switched to a defined contribution system, the average benefit was only $11,230 per year compared to $16,797 per year under the defined benefit system.  Nebraska did find it cost taxpayers much more administratively to run a defined contribution system. Defined Contribution—Reality

19. © Center for Tax and Budget Accountability 2008 19  In the defined contribution setting, investment returns belong solely to an employee who makes the investment in his or her retirement account, and are not available to reduce the employer contribution.  Fully funded defined benefit plans attain high enough investment returns that public sector employers are able to reduce the amount of normal cost paid from tax collections, freeing taxpayer revenue to cover services.  Example—the Illinois Municipal Retirement Fund (IMRF). As of December 31, 2006, IMRF was 100.5 percent funded on an actuarial basis, because of this, the contribution rates fell from an average10.4 percent in 2006 to 9.72 percent in 2007, saving taxpayers millions. Defined Contribution—Reality

20. © Center for Tax and Budget Accountability 2008 20 What about the private sector jump to defined contributions –doesn’t business know best? ERISA; Fortune 500; Not Their Problem Defined Contribution—Reality

21. © Center for Tax and Budget Accountability 2008 21  Defined contribution systems have the advantage of creating fiscal discipline that is absent from a defined benefit system, because they force a state to make the required employer contribution into the employees account on a per pay period basis, rather than offering promises of future benefits.  From an employee's perspective, a defined contribution system has two seeming advantages over a defined benefit system: (i) the benefits would be portable from job to job; and (ii) an employee could access his or her defined contribution account for emergencies pre- retirement (although subject to tax penalties, in certain situations). (This could also be a curse) Defined Contribution—Reality

22. © Center for Tax and Budget Accountability 2008 22 Three main disadvantages of a dc system are: (i) reduced and uncertain retirement benefits; (ii) lesser investment returns; and (iii) market risks. On balance, when funded in a fiscally responsible manner, a defined benefit system permits the public sector to provide its workers with better retirement benefits at lower overall cost to taxpayers. Defined Contribution—Reality

23. © Center for Tax and Budget Accountability 2008 23 Growth in State Issued Revenue and General Obligation Bond Debt: 2000-2006 $7.684 $8.444 $9.543 $20.812 $21.809 $22.241 $22.820 $0.000 $5.000 $10.000 $15.000 $20.000 $25.000 20002001 2003200420052006

24. © Center for Tax and Budget Accountability 2008 24 Tax-Supported Debt Per Capita: Illinois Ranks 6th Nationally in Debt Per Capita which is More Than Double the National Average $2,019 $999 $0 $500 $1,000 $1,500 $2,000 $2,500 IllinoisNational Average

25. © Center for Tax and Budget Accountability 2008 25 Illinois also ranks high nationally when comparing tax-supported debt as a percentage of personal income. Again, the state has almost double the national average. Moody’s rates Illinois lower than 30 states in its credit rating. Thirteen states rank similar to Illinois and three are given credit ratings lower than Illinois.

26. © Center for Tax and Budget Accountability 2008 26 Center for Tax and Budget Accountability www.ctbaonline.org Ralph M. Martire Executive Director (312) 332-1049 rmartire@ctbaonline.org rmartire@ctbaonline.org Jourlande Gabriel Director of the Illinois Retirement Securities Initiative (312) 332-1103 jgabriel@ctbaonline.org jgabriel@ctbaonline.org For More Information: